The United States continues to dominate the world stage not only through unmatched military strength but also via a unique financial advantage: the ability to borrow at remarkably low interest rates. This dual hegemony, often referred to as the “exorbitant privilege” of the US dollar, enables the US to finance its military at a fraction of the cost faced by other nations, thereby solidifying both its geopolitical leadership and financial supremacy. However, this extraordinary position is not guaranteed to last indefinitely. The intertwined dynamics of military and financial power are fragile, and shifts in global power could upend the US’s privileged status.
Military Dominance Drives Financial Privilege
The interdependence of military might and financial dominance is not new. Historically, the world’s dominant powers have seen their military superiority reflected in their ability to borrow at favorable rates. A game-theoretic model developed by Carolin Pflueger and Pierre Yared (2024) illustrates this self-reinforcing cycle between military and financial power. Military strength enhances investor confidence, ensuring the ability to meet financial obligations even in times of crisis. At the same time, financial dominance enables nations to fund their military operations at lower borrowing costs, further consolidating their global position.
The US’s ascendancy to the forefront of global finance was not accidental. After World War I, the US surpassed the UK as the world’s leading financial power, a shift mirrored by bond yield differentials that favored American debt. Similar transformations occurred in earlier periods, such as after the Napoleonic Wars, when the UK displaced the Netherlands as the dominant financial power. These historical shifts underscore a critical pattern: financial dominance is often a consequence of military hegemony, particularly during periods of global instability.
Geopolitical Crises Reinforce Financial Strength
Geopolitical crises have historically enhanced the borrowing advantage of militarily dominant nations. As global tensions rise, investors flock to assets issued by the US, seeking the security of American debt. In the wake of conflicts such as the Gulf War, Iraq War, and Russia’s invasion of Ukraine, US bond yields consistently dropped as the US was seen as the safest haven for capital. This pattern emphasizes that military might is not a secondary factor in securing financial supremacy—it is a primary driver.
Investors view military dominance as a guarantee that the country in question will not face the economic turmoil associated with military defeat. Countries that emerge victorious from major conflicts, such as the US after both World Wars, tend to enjoy low inflation, robust financial stability, and a growing influence over global markets. Conversely, nations on the losing side suffer from rampant inflation, currency devaluation, and soaring debt levels.
The Fragility of US Dominance
Despite the strong connection between military power and financial advantage, this system is vulnerable to disruption. The global financial order is susceptible to challenges from emerging powers, especially those with significant financial market influence. For instance, China’s efforts to internationalize the renminbi (RMB) pose a direct challenge to the US dollar’s dominance. Should the RMB achieve global acceptance, it could undermine the US’s financial advantage, destabilizing the delicate balance that currently supports both its economic and military supremacy.
The implications of such a shift could be profound. A weakened dollar would erode the US’s ability to finance its military at low interest rates, potentially leading to increased borrowing costs and reduced global influence. As global financial markets become more diversified, the US’s privileged position could be threatened, accelerating a shift in global power dynamics.
Strategic Implications for US Policy
The US’s continued military and financial dominance depends on prudent fiscal management. The ability to access global financial markets at favorable terms is a critical asset for maintaining geopolitical influence. High national debt or failure to manage debt ceilings could undermine this advantage, making it more difficult for the US to finance its military ambitions.
Debt-financed military spending, however, is not just a burden—it is a strategic tool. By borrowing to fund defense spending, the US secures its geopolitical dominance, which in turn strengthens its financial position. Conversely, severe cuts to military spending would have disastrous consequences, not only from a security standpoint but also economically. A weaker military would undermine investor confidence, leading to higher interest rates and escalating financial costs, creating a feedback loop that could weaken both US global influence and financial stability.
The Global Stakes
In conclusion, the relationship between military and financial dominance is not a theoretical concern—it is essential to the stability of the global system. America’s “exorbitant privilege” is the foundation of its leadership on the world stage, but it is not an indestructible advantage. As the global landscape shifts towards a more multipolar world, the US faces increasing challenges to its dominance, both militarily and financially. To preserve its leadership, it must prioritize fiscal discipline and maintain its military strength. Without these measures, the cycle that has reinforced American hegemony for decades could unravel, with severe consequences for both US national security and the stability of the global financial system.
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